Finished goods inventory is the total number of manufactured products that are available, in stock, and ready for purchase by vendors, retailers, and consumers. With that said, finished products are often a relative concept, since a seller’s goods may actually become another buyer’s raw materials inventory. Still, finished goods are an important inventory management metric, and the formula is helpful when determining the valuation of the goods for sale.
Finished goods inventory is great for tracking production and work-in-process inventory, which can be helpful for ensuring that the financial statements in the current and future accounting periods are accurate.
The finished goods inventory formula is:
Finished goods = [COGM – COGS] + previous finished goods inventory value
To calculate your finished goods inventory, you do need to know your cost of goods manufactured (COGM), as well as your cost of goods sold (COGS). Keep in mind, as you’re evaluating your COGM and COGS, you’ll need to use the same time period for both – consistency is key to guarantee accuracy with these formulas.
The COGM can be calculated as: [beginning WIP inventory + total manufacturing cost] – ending WIP inventory. Next, COGS can be found using: [beginning inventory + purchases during the period] − ending Inventory.
With these numbers, you can implement the finished goods formula. Remember that you’ll need to check your inventory records to capture the finished goods inventory for the previous period.)
Let’s say at the end of last year, your pillow company had 1,000 finished pillows in stock. Each pillow cost $4 to produce, so the previous finished goods inventory value would look like: 1,000 x $4 = $4,000. During this current fiscal year, your brand manufactured 1,200 pillows and sold 800 of those. The COGM is [1,200 x $4 = $4,800] and the COGS is [800 x $4 = $3,200].
Now, subtract the COGS from the COGM: $4,800 – $3,200 = $1,600. From there, you can calculate the new finished goods inventory by adding the previous finished goods inventory value to the answer from COGM minus COGS. This looks like: $4,000 + $1,600, meaning your finished goods inventory is worth $5,600.